The Consequences of Bankruptcy

For most Americans bankruptcy is a frightening prospect.  It means that the debtor is unable to pay his or her bills because the debt exceeds the assets.  There are many pervasive bankruptcy myths about the effect of bankruptcy on the debtor’s financial life that add to the fear of bankruptcy.  As a result, most Americans are unaware of the actual consequences of bankruptcy and how to manage them.

If you are contemplating filing for bankruptcy, it is important to understand the real consequences.  It is a fact that the bankruptcy will be reflected on the consumer’s credit report for up to ten years.  However, it is worthwhile to contact credit agencies a few years prior because many agencies are willing to remove the bankruptcy before the typical ten-year period expires.

Although creditors and employers will see the bankruptcy on the debtor’s credit report, the upside is that there are benefits to filing for bankruptcy that will also be reflected in the debtor’s credit report.  Once a consumer gets to the point of filing for bankruptcy, many already have poor credit scores.  The post bankruptcy credit report may actually improve after the filing because many companies will consider the filer less of a risk since the consumer has improved their financial situation by discharging or restructuring debts.

Additionally, the debtor is considered less of a financial risk going forward because under bankruptcy laws, the individual may not re-file for bankruptcy for up to seven years.

Even if the bankruptcy stays on the credit report for a full ten years, there is financial life after bankruptcy.  Many companies will still extend credit to individuals who have filed for bankruptcy in the past.  The credit may be at a higher rate and with a lower limit, but there will still be credit opportunities.

Bankrupt debtors can also receive secured credit cards.  On secured credit cards, banks extend credit which is secured by the amount the account holder deposits on the card.  The account holder can only charge the amount deposited on the secured card.  These cards can be a good way to safely rebuild credit.

The idea is to start rebuilding slowly after bankruptcy.  By receiving credit and sticking to payment obligations, creditors will gradually realize that the debtor is not a financial risk.  These creditors will then be more than willing to extend credit to the debtor post bankruptcy.  After all, creditors make their money by extending credit to debtors.